Tax deduction of customer loyalty scheme costs
Tax Court case 13988
Customer loyalty schemes are widely used. In the absence of specific tax legislation that deals with these schemes, the deductibility of the costs associated with a scheme must be determined in accordance with the general provisions governing the deductibility of expenditure, including section 24C. The tax court recently ruled in case 13988 that the taxpayer was allowed to claim a deduction under section 24C for its obligations relating to vouchers issued in terms of its customer loyalty programme. This article provides a brief review of the matters considered in this case.
Assumption of contingent liabilities in restructuring transactions
Binding Private Rulings 317 and 319
The tax treatment of contingent liabilities transferred and assumed as part of disposing of a business has been contentious for a number of years. Interpretation Note 94 provides clarity about SARS’ views in this regard. Two recent rulings that deal with transactions where the corporate rules apply and the transferee assumes contingent liabilities from the transferor would suggest that some interpretation risk or uncertainty may still exist in this context.
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Accounting for physical settlement of commodity contracts
IFRIC Agenda Decision: Physical Settlement of Contracts to Buy or Sell a Non-financial Item (IFRS 9 Financial Instruments)— March 2019
Contracts to buy or sell commodities are accounted for as financial instruments in terms of IFRS 9 Financial Instruments, except if these contracts are entered into by the entity to deliver or receive the underlying commodities. It may happen that a commodity contract is accounted for in terms of IFRS 9, but is ultimately physically settled. The IFRIC published an agenda decision in March with its view on how the physical settlement of such a contract should be accounted for. This article provides an overview of the alternatives considered and the position taken by the IFRIC.
VAT: Separation of supplies into parts
VAT Case 1558
Vendors who make supplies that consist of more than one part may be required to separate the supply into its parts and determine the VAT implications of each part separately in certain circumstances. Section 8(15) of the VAT Act governs when a supply should be separated into its components in this manner. The tax court recently considered the application of this provision in Case No: VAT 1558.
Tax complexities of lease arrangements
Tax Court Case 14189
The tax implications of lease arrangements may be inherently complex in nature. The tax court recently considered a case dealing with lease premiums. While it is perhaps not possible to glean much from the judgment from a technical perspective, it is submitted that there are some lessons to be learnt from this case for taxpayers who enter into and have to dispute rather complex commercial arrangements.
Budget 2019: Business and corporate tax perspective
Budget Review 2019
The National Treasury published the Budget Review 2019 on 20 February 2019. Although the Budget Review does not increase tax rates and has generally been perceived as containing relatively few tax changes, some of the proposals in Annexure C may have a significant impact for the taxpayers affected by it. This article provides an overview and brief analysis of a selection of these proposals.
Deductions allowed for future expenditure
CSARS v Big G Restaurants (Pty) Ltd
Section 24C of the Income Tax Act provides a mechanism through which taxpayers can achieve an extent of matching between the timing when large advance payments are taxed and related expenditure deducted. In CSARS v Big G Restaurants (Pty) Ltd the SCA considered the application of this provision in the context of income earned from operating a restaurant and upgrading or refurbishment expenditure required in terms of a franchise agreement.
Timing of accrual of proceeds from cash sales of property
Milnerton Estates Ltd v C:SARS
Taxpayers are taxed on amounts at the earlier of receipt or accrual of those amounts. The recent judgment in Milnerton Estates Ltd v CSARS in the Supreme Court of Appeal shows that the question around timing of an accrual is still a contentious one. In this case the court considered the application of a deemed accrual provision. It concluded that the amounts accrued to the seller when the agreements were entered into, as opposed to when the property was transferred to the purchasers.
Amendments to the debt relief tax rules
Taxation Laws Amendments 2018
The Income Tax Act contains a set of rules that affect the borrower when it is relieved of a debt obligation. These rules were significantly amended in 2017, with a number of adverse implications. During the 2018 legislative cycle the debt relief rules were further amended to refine the problematic aspects introduced in 2017. This article provides a brief overview of the amendments made to these rules as part of the 2018 legislative cycle.
Accounting for business combinations: Definition of a business
Changes to IFRS 3 Business Combinations
The accounting standard IFRS 3 Business combinations prescribes how transactions in which an entity obtains control over a business should be accounted for. A review of the standard by the IASB indicated that the current definition of what constitutes a business poses certain challenges in practice. The definition of a business has been revised to address some of the concerns raised. A simplified model to assess whether a business is acquired is also introduced into IFRS 3.
Changes to venture capital company tax regime
2018 Taxation Laws Amendment Bill
The venture capital company tax regime was introduced in 2008 to incentivise equity investments in small and upcoming businesses. A number of amendments, coming into effect between 24 October 2018 and 1 January 2019, have recently been made to this regime as part of the 2018 legislative cycle. The majority of the amendments are aimed at curbing practices that were considered by the National Treasury to be abusive. There are however some amendments that provide venture capital companies some leeway around complying with the prescribed rules.
Valuation of trading stock for tax using IFRS as a basis
C:SARS v Volkswagen SA (Pty) Ltd
Income tax returns are often prepared using financial statements as a starting point and making some adjustments to reflect the differences between accounting profits and taxable income. The SCA considered the appropriateness of using net realisable value, as determined in terms of IAS 2 Inventory, as a basis for valuing closing stock for tax purposes. It concluded that while there is some overlap conceptually, trading stock cannot necessarily be taken into account at net realisable value for tax purposes.
Capitalisation of borrowing cost on land
IAS 23 Borrowing costs
IAS 23 prescribes when borrowing costs incurred in respect of a qualifying asset must be capitalised to the cost of the asset. An important element of this determination is the timing when the capitalisation of borrowing cost commences or ceases. The IFRIC Interpretation Committee issued an agenda decision that provides some guidance on the timing when capitalisation of borrowing cost in respect of land should cease if a building is being constructed on such land.
Respublica case: Characterisation of the supply of property
CSARS v Respublica (Pty) Ltd
The proper characterisation of a supply of property in terms of a lease agreement for VAT purposes may be quite challenging. The SCA was called upon to consider the characterisation of an arrangement in terms of which the taxpayer, Respublica, made a property available to the TUT, which in turn used to property as a student residence. The SCA ruled that based on the contractual arrangements the taxpayer did not make a supply of commercial accommodation.
Accounting for Black Economic Empowerment transactions
Financial Reporting Pronouncement 2
The Department of Trade and Industry published a financial reporting pronouncement earlier in this year that deals with the accounting treatment of BEE transactions. The pronouncement focusses on the application of IFRS 2 to transactions entered into to obtain BEE credentials and the accounting treatment of such credentials. This article highlights some further accounting matters, which are not specifically addressed in the pronouncement, that often arise from BEE transactions.
Kangra Group case: Deductibility of damages settlement payment
Kangra Coal (Pty) Ltd v C:SARS
In Kangra Group (Pty) Ltd v C:SARS the Western Cape division of the High Court considered the deductibility of payments made in settlement of claims for damages as a result of a breach of contractual obligations. The court ruled that the payment was not deductible. This judgment again illustrates that the deductibility of expenditure is a fact specific enquiry; the deductibility of damage-related payments is no exception.
The tax effect of terms of financing instruments
Crookes Brothers Limited v C:SARS
Crookes Brothers Limited v C:SARS is a rare case that deals with South African transfer pricing. The court considered the application of an exemption for equity-like loans and concluded that loans that could be payable within 30 years from the date advanced in certain circumstances did not qualify for the exemption. The reasoning followed may be relevant to consider when interpreting other provisions that also aim to distinguish between debt- or equity-type of instruments.
Tax proposals 2018: Wealth planning and investments
Draft Taxation Laws Amendment Act 2018
The draft Taxation Laws Amendment Bill, published on 16 July 2018, includes a number of proposals that may impact wealth planning and investment instruments. In particular, the proposed changes affect the tax consequences of offshore trust structures. Amendments are also proposed to the venture capital company regime. The proposals are open for comment and may still change before they are enacted.
Tax proposals 2018: Business
Draft Taxation Laws Amendment Act 2018
The draft Taxation Laws Amendment Bill was published by the National Treasury on 16 July 2018. It contains a number of proposals that will affect businesses. This article provides a brief overview of some of these proposed amendments. Businesses should keep a close eye on these proposals as they develop into amendments to be contained in the tax law amendment bills.
Prescription of self-assessed taxes arising from low-interest loans
C:SARS v Char-Trade
The Tax Administration Act makes provision for prescription of assessments. This ensures that taxpayers have finality in relation to assessments. The SCA recently considered the application of the prescription rules to an assessment for STC that was raised by SARS in circumstances where the taxpayer never submitted any return. Despite the fact that STC is no longer in effect, the views of the SCA are relevant in other instances where low-interest loans have tax implications.
SARS views on venture capital company rules
Draft Guide on VCCs
The venture capital company regime was introduced in 2008 to encourage investments that provide equity funding to small and medium sized businesses. There are a number of areas of uncertainty in the regime. SARS issued a draft guide on the VCC regime for comment. This article reviews some of the SARS views evident from this draft guide that stakeholders ought to be aware of.
Tax implications of ceded dividend rights
CSARS v KJW Investments
The favourable tax treatment of dividends makes it susceptible to be used as a mechanism to disguise other income in a manner to also enjoy this treatment. The KWJ case deals with an instrument that provided the taxpayer with a yield in the form of antecedent dividend rights. Specifically, the judgment considered the timing and nature of the accrual to the taxpayer in such a case.
Tax Administration: Follow the rules strictly
CSARS v Danwet
The Tax Administration Act (TAA) and Rules promulgated under section 103 of the TAA contain detailed prescriptions as to processes to be followed in resolving disputes. The judgment in C:SARS v Danwet illustrates the importance of strictly adhering to these requirements as the process progresses.
A tax perspective on the valuation of shares
CSARS v The Executors of Estate Late Sidney Ellerine
The SCA recently considered the valuation of preference shares held by a person at the time of death for purposes of determining the capital gains tax arising from the deemed disposal of the shares. It is submitted that this judgment, although fact specific, should remind taxpayers of the importance of valuations for tax purposes and the rigour that needs to be applied when performing such valuations.
Understatement penalties - Part 2: Evaluating advice obtained
ABC Trading (Pty) Ltd v C:SARS (Tax Court case 13686)
Additional assessments are often accompanied by the imposition of understatement penalties (USP). The mere fact that a position taken by a taxpayer was based on advice obtained by the taxpayer may not, in itself, be sufficient grounds to reduce the USP imposed. This article considers a recent case and the consideration given by the court to a tax opinion obtained by the taxpayer.
Understatement penalties - Part 1: Effect of advice obtained
Tax case 14055
Additional assessments are often accompanied by the imposition of understatement penalties (USP). Over the past two years, a body of case law has started to develop around the behaviours that determine the rate at which USP are imposed. This article considers two cases on the meaning of not having reasonable grounds for a position taken and gross negligence where tax advice was obtained.
VAT rate changes to 15%
Budget Review 2018
The increase in the VAT rate from 14% to 15% was arguably the biggest announcement in the 2018 Budget Review from a tax perspective. This change in VAT rate will impact consumers directly as the cost of goods or services increase from 1 April 2018. However, VAT vendors may also face some transitional challenges as a result of the change in the rate. These include determining the appropriate rate of tax on supplies made around 1 April 2018 and claiming input tax at the correct rate.
Budget 2018: Wealth perspective
Budget Review 2018
The most significant proposals in the 2018 Budget Review will probably affect all taxpayers in South Africa, not only those with accumulated wealth. A number of proposals may however particularly affect wealth planning and structures used to house wealth. These include an increase in the estate duty rate, a proposal to increase the official rate of interest, strengthening of anti-avoidance rules aimed at foreign trust structures and removing further obstacles faced by venture capital companies.
Budget 2018 - Business perspective
Budget Review 2018
The 2018 Budget Review contains a number of proposals that will impact businesses operating in South Africa. From an operational perspective, the transition to a VAT rate of 15% may provide some challenges. In addition, an outlook on the South African corporate tax rate and a number of proposals specifically aimed at transactions undertaken by business are presented in the Budget Review.
The finer details of asset-for-share transactions
Binding Private Ruling 287
The Income Tax Act allows for roll-over relief in certain circumstances where assets are contributed to a company in exchange for shares in that company. Binding Private Ruling 287 is a good illustration that the provisions of this roll-over relief measure requires detailed consideration before it can be concluded that it applies to a transaction.
The fine line between dividends and income
CSARS v Reunert Ltd
Dividends are payments received by a person in respect of shareholding in a company. In the recent case of C:SARS v Reunert Ltd the SCA was required to consider an arrangement that involved commission to top up dividends received by a shareholder. The case shows that taxpayers have to be careful when negotiating commercial deals involving dividend payments as consideration.
Tax issues: socio-economic and development expenditure
Binding Private Ruling 282 and Tax Court case 14055
South African businesses play an integral role in socio-economic upliftment and development of communities. Expenditure incurred for this purpose may have tax implications for the business involved. This article considers some lessons for businesses from two recent contrasting developments in the form of a binding private ruling (BPR282) and a tax court case.
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Dividend-stripping and share buy-back transactions
Taxation Laws Amendment Act 2017
The National Treasury introduced anti-avoidance rules that target dividend-stripping and share buy-back transactions with effect from 19 July 2017. These rules result in certain dividends being taxed as proceeds upon the disposal of shares. Share buy-backs from and extraction of value by significant corporate shareholders will require careful attention going forward.
Revised debt restructuring tax rules
Taxation Laws Amendment Bill 2017
The Taxation Laws Amendment Bill introduces a revised set of rules that will apply to debt restructuring transactions that occur during years of assessment that commence on or after 1 January 2018. The scope of the new rules are arguably wider than the existing provisions. Some relief is afforded in a domestic group context for dormant companies and debt capitalisation transactions.
Disputing understatement penalties
Tax Court case (IT14247)
Understatement penalties (USP) are imposed in respect of understatements by a taxpayer. A recent tax court case highlighted the fact that a taxpayer is not necessarily protected from USP on the basis that payments have been made to SARS, without further compliance with tax laws. In addition, this case also illustrated that taxpayers need to carefully consider their own position when deciding whether to dispute USP or not. The tax court may in certain circumstances increase USPs.
Share incentive schemes: The role of trusts
Binding Private Ruling 277
Share incentives schemes often involve the use of trusts to administer the awards made to employees. Previous rulings indicated that a share incentive trust will dispose of shares acquired for purposes of the scheme when these shares vest and therefore potentially be liable for CGT on this disposal. BPR277, however, suggests that a different position may exist if the trust acquires the shares for the beneficial interest of the employees from the date of initial acquisition.
Tax proposals: Debt capitalisation
Draft Taxation Laws Amendment Bill 2017
In difficult economic times, debt capitalisation may afford companies some room to improve their financial position. Currently, debt capitalisation by financially distressed borrowers may result in debt reductions for tax purposes. The National Treasury has proposed that certain transactions to settle debt by issuing shares should be excluded from the debt reduction rules. The proposals have a relatively narrow scope and are accompanied by potentially onerous anti-avoidance provisions.
Tax proposals affecting share disposals
Draft Taxation Laws Amendment Bill 2017
Since the introduction of dividends tax in 2012, in particular the company to company exemption, taxpayers have employed a number of methods to convert taxable proceeds upon the sale of shares into non-taxable dividends. The National Treasury has proposed a broad anti-avoidance provision that is likely to curb such arrangements but also impact many other share disposal transactions.
Tax proposals affecting trusts
Draft Taxation Laws Amendment Bill 2017
A number of amendments proposed by the National Treasury are, if implemented in their current form, likely to significantly impact on trust structures. The first is the expansion of section 7C to loans provided to certain companies. In addition, measures are proposed to incorporate foreign companies held through foreign trusts or foundations into the controlled foreign company regime.
Investments funded by venture capital companies
It appears as if interest in making use of the venture capital company tax incentive is increasing. BPR274 deals with an investment by a venture capital company in a solar electricity generation business. The ruling deals with some of the matters that are contentious in the area of VCC investments, as evidenced by a number of earlier rulings on the same aspects of the incentive.
Timing of asset disposals and accrual of proceeds
M v C:SARS (Cape Tax Court - Case 14005)
The timing of disposals of assets and the resulting accrual of the proceeds have been contentious aspects over the years. In a recent case decided in the Cape Tax Court it was held that s 24(1) applies to cash transactions. As a result, the date when an agreement for the disposal of certain property is entered into plays an important role in determining the timing of the seller’s tax liability arising from the sale of the property.
Classification of an arrangement as an interest-bearing instrument
Binding Private Ruling 272
The Income Tax Act contains specific provisions relating to the timing of the accrual or incurral of interest for tax purposes. BPR272 deals with an arrangement that contains deferred payment terms and amounts determined with reference to an interest rate. The ruling however confirms that this arrangement is not an instrument within the scope of section 24J. Determining whether an arrangement is interest-bearing requires a detailed analysis of its overall terms and yield.
Capital gains tax: Cancellation of disposals
New Adventure Shelf 122 v C:SARS
Capital gains tax is imposed on any amount that a taxpayer becomes entitled to as a result of a disposal of an asset, whether this amount has been received in cash or not. It was confirmed in New Adventure Shelf 122 v C:SARS that a taxpayer does not have grounds to request that the assessment where such capital gains tax was levied if the proceeds become irrecoverable.
Tax effect of fixing errors
Binding Private Ruling 268
BPR268 deals with the tax implications of an arrangement that is aimed at correcting previous errors by a taxpayer. On the face of it, the transaction appears relatively simple but further consideration of the possible uncertainty that warranted requesting a ruling reveals some of the complexities of it in light of the specific requirements of the tax law. The ruling should serve as a reminder to taxpayers not to underestimate the tax complexities that even the simplest transaction may hold.
Bad debts: Effect on exchange gains or losses
Draft Interpretation Note on exchange gains and losses
The tax treatment of unrealised exchange gains or losses poses certain challenging questions when a foreign denominated debt becomes irrecoverable. SARS issued a draft interpretation note that provides their views on, amongst others, the tax effect of such gains or losses when a debt goes bad or is reduced. While the effect of unrealised exchange differences appear to be neutral from a lender perspective, this is not necessarily the case for a borrower whose debts are reduced.
South African DTAs: Most-favoured-nation clauses relating to tax on dividends
Binding Private Ruling 267
Binding Private Ruling 267 confirms that the applicant, a South African company that is a wholly owned subsidiary of a Swedish company, does not have to withhold dividends tax on proposed dividends to its parent as a result of the application of the most-favoured-nation provision in Article 10(6) of the SA/Sweden treaty in light of the dividend taxing rights in the SA/Kuwait treaty.
South African Budget 2017: Business perspective
Budget Review 2017
The South African corporate tax rate remains unchanged at 28%. The increase in the dividends tax upon distribution of company profits to 20% may however impact on business structures that rely heavily on dividend flows. Business tax related aspects that the National Treasury will review during the 2017 legislative cycle include a number of measures planned to strengthen anti-avoidance rules but also some relief for legitimate transactions currently adversely impacted by tax.
South African Budget 2017: Wealth and investment perspective
Budget Review 2017
A number of tax rate increases were announced in the 2017 Budget Review on 22 February 2017. These may impact directly on investment yields and re-investment base of investors. Some of these developments, in particular the gradual increase in the trust tax rates, may require investors to reconsider investment holding structures. A number of aspects up for review by the National Treasury in 2017 may significantly impact on structures that house wealth.
Clarification of tax on payments to non-executive directors
Binding General Rulings 40 and 41
There has been uncertainty around the tax treatment of fees paid to non-executive directors. While it is clear that the amounts will be subject to income tax, the question was when and how this tax should be collected. In addition, differing views existed as to whether fees paid to non-executive directors should be subject to VAT. SARS clarified these two questions by issuing two binding general rulings. The rulings indicate that while the payments are not subject to employees tax, it may be subject to VAT.
Tax on profit-sharing loan arrangements
Binding Private Ruling 263
The Income Tax Act contains rules that re-characterize interest on certain loans to be treated as dividends for tax purposes. The effect of these provisions is that the interest is not deductible by the borrower, while the yield may be subject to dividends tax and qualify for the dividend exemptions from normal tax in the hands of the lender. Binding Private Ruling 263 deals with a profit-sharing loan arrangement and provides a good example of payments that the re-characterisation rules apply to.
Changes to PAYE taking effect from 1 March 2017
Taxation Laws Amendment Act 2016 & Tax Administration Laws Amendment Act 2016
A number of amendments made at the end of 2016 take effect from 1 March 2017. This includes amendments relating to PAYE. Two such amendments are particularly likely to affect remuneration of directors or executives. The first relates to a requirement to withhold PAYE on deemed remuneration in respect of directors of private companies. The second amendment deals with the taxability of dividends in respect of certain unvested equity instruments and PAYE obligations on certain dividends.
Tax on vesting of shares by share incentive trust
Binding Private Ruling 259
Many employee share incentive schemes involve the use of trusts to house the shares until such time as they vest in the employees. Often the planning of the scheme focus on the application of section 8C, which taxes the gains on the shares in the hands of the employees. BPR259 reminds planners of a further aspect to be considered, namely the tax implications of the vesting of the shares for the trust.
Purpose of a loan and related interest expenditure
Cape Town Tax Court - Case 13791 & 13792
Interest is only deductible if incurred in the production of income and for purposes of carrying on a trade. This requires that the loan in respect of which the interest is paid and the trade/income should be closely connected. A recent case heard in the tax court illustrates that the original purpose of a loan for a specific purpose plays an important role in this regard, even in the case of a loan with flexible payment terms.
Contingent liabilities assumed as part of a going concern
Interpretation Note 94
The tax implications of assuming contingent liabilities as part of a sale of business present uncertainties for both sellers and purchasers. The South African Revenue Service issued Interpretation Note 94 during December 2016 to provide guidance in this regard. The approach set out in this note require taxpayers to pay careful attention to, amongst other, the classification of contingent liabilities assumed, values attached and allocation of these items as purchase consideration as these factors have a significant effect.
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Tax considerations in respect of loans to trusts
Introduction of section 7C of the Income Tax Act
From 1 March 2017 onwards, taxpayers have a further consideration in the form of section 7C of the Income Tax Act to take into account when doing estate planning. This provision deals with loans advanced by or at the instance of a natural person to a trust to which that person is connected. This provision may require a careful consideration of the overall benefits, including tax benefits, of housing certain assets in a trust as there may be a recurring tax cost associated to this decision.
Donations tax effect of shares disposed to BEE shareholders
Binding Private Ruling 253 (BPR 253)
Given the changes in legislation, regulations and codes relating to Black Economic Empowerment (BEE) over the past two years or so, many South African businesses may need to enter into transactions to arrange or re-arrange their affairs in order to ensure that they maintain the necessary BEE scorecard to be able to conduct business. The introduction of BEE shareholders into an ownership structure may involve transactions that do not necessarily take place at consideration that would otherwise be viewed as market related. A recent ruling provides a useful reminder that tax, including donations tax, is an aspect not to be lost sight of in such transactions.
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Zero-rating of services to foreign persons
XO Africa Safaris v C:SARS (SCA)
This case deals with the zero-rating of services rendered to foreign persons (tour operators/tourists). The court had to determine whether the recipients of the services rendered were in South Africa at the time of the supply. It was found that the taxpayer undertook to provide services enjoyed by tourists while in South Africa and that such a supply could not be zero-rated. It is submitted that this case highlights the need for taxpayers to take a cautious approach when zero-rating supplies. Certain checks, such as ensuring that the contracts align with the arguments that are critical to the zero-rating and testing the fundamental soundness of the outcome, are advisable.
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